Welcome to Diös Fastigheter AB Interim Report January to March 2022. My name is Karen, and I'll be coordinating the call today. If you would like to ask a question during the presentation, you may do so by pressing star one on your telephone keypad. I'll now hand over to Knut Rost. Please go ahead.
Good morning and a warm welcome to this presentation of the Diös result for the first quarter of 2022. My name is Knut Rost. I'm the CEO of Diös, and together with our CFO, Rolf Larsson, I will present our first quarter, which is record strong. I will start by going through highlights and major events of the quarter. Then Rolf will dig into the result and the key figures, and at the end, I will finish by giving you an outlook on the future. If you have any questions, there will be a Q&A session after the presentation. Listen for instructions how to ask questions. If you're listening on replay, you can always reach out to us with your questions. Contact details will be shown at the last slide and on our website.
The result for the first quarter of 2022 is the strongest first quarter ever, and a nice follow-up of the strong performance from full year 2021. We are improving almost all figures. We have continued to be very active in the transaction market and the net letting bodes well for even stronger cash flow. First of all, the net letting for the first quarter summed to SEK 22 million. Last year's total was SEK 30 million. This is a result of very active property management with high local knowledge and ambition, and based on a strong market. We have managed to let out several larger vacant spaces, both in Sundsvall and Gävle that will increase the occupancy rate. I'm also very happy that many new contracts are green leases. Also, on the good side, we have fewer lease terminations than we had before.
Number two, our surplus ratio was 65%, which is very good for a first quarter considering the period with higher costs for snow and cold weather. We have had some positive effect from winter-related costs, but we have also lowered our energy takeout. Third, our property values have continued to increase. The unrealized value changes in the property portfolio for the first quarter was SEK 533 million, which gives us a total property value for the whole portfolio of SEK 30 billion. We are in a position of horrible events going on in Ukraine. First and foremost, the humanitarian catastrophe followed by obvious changes within Europe and the world with rising inflation, higher interest rates, and disrupted trading channels that will affect us and our stakeholders. I will get back to that later on.
We have been very active in the beginning of this year on the transaction market, something we promised you in last year. We have put most of the capital from our direct share issue in December into work. Due to strong value uplift, we have more money to put to work. We have also got two major zoning plans approved. For example, first, we acquired six new properties in early January that we communicated previous quarter. These properties are lifting the rental income by SEK 13 million during the first quarter, and we also acquired two properties in Luleå first of March. We also released two new acquisitions, residential in Skellefteå and a portfolio in Falun Borlänge. In March, we released the divestment of six retail properties.
With these transactions, we are shifting out assets who we see have limited potential, and we are creating liquidity to take advantage of new opportunities. We got approval from the zoning plan for our new block, Västra Stranden in Luleå. It is currently a park and parking space, which we will develop gradually. The first step includes office premises for Försäkringskassan. In step two, we plan to build two residential buildings. More details on that project will be published later. In Umeå, we got the zoning plan approval for the property Vale 17. We already have an anchor tenant for the commercial areas, and beyond that we plan to build more centrally located residentials. I will now hand over to Rolf, who will present the results in more detail. Rolf.
Thank you, Knut. As Knut said, the first quarter was very strong. Like-for-like rental growth was up 3% due to indexation, renegotiations, and new lettings. The operating surplus increased 16% compared to last year and amounted to SEK 336 million, corresponding to surplus ratio of 65%. We have somewhat higher financial costs due to increased interest-bearing liabilities, and the average paid interest rate for the quarter was 1.1%. Income from property management increased by 17% and property valuations amounted to SEK 533 million, which represent 1.8% of the market value. I will comment on that later.
Profit after tax was strong and amounted to SEK 708 million, which is 36% better than last year. As you can see, our property portfolio is well-diversified in terms of both segment and geography. We have previously said that we want to grow in Skellefteå. As Knut said before, we took over five properties in Q1, which means that the rental value per business area increases from 7%-10%. We have also acquired three more properties in Skellefteå with access during Q2. We have a low tenant concentration risk. Our 10 largest tenants, of which six are tax finance, account for 16% of our total rental income with an average lease term of 6.6 years. The average lease term for all commercial premises amounted to 4.3 years.
30% of our rental income comes from tax-financed operations and 8% from residentials which means that we have a low risk in our cash flow. The market value of our properties amounted to SEK 29.8 billion, an increase of SEK 1.8 billion since turn of the year. Approximately SEK 1.3 billion is due to acquisitions, divestments, and investments, and SEK 0.5 billion is a result of property revaluations. The value was positively affected by higher market rents and higher operating surplus. The average yield was 5.47% which is 3 basis points higher compared with the turn of the year. With an average interest rate of 1.2%, this means that we still have a yield gap of 4.3%.
On a yearly basis, we're currently investing just over SEK 1.6 billion in tenant improvements, property improvements, and new build. All our ongoing projects are proceeding according to plan. Before we start our projects except residentials, we always have 100% signed leases. We currently have around 90,000 square meters under construction with an investment volume of around SEK 2.3 billion. In addition, we have 200,000 square meters in existing or possible building rights in several locations, and 55% of these refers to residential. Here you can see some example of our major ongoing projects with an investment volume of SEK 2.1 billion in total. Most of the rental income comes from tax finance operations. All these projects will be certified according to BREEAM-SE Very Good or Excellent.
Three of these projects will be completed in 2022, and will thus have a positive effect on our operating surplus. We currently have 65% of our outstanding loans with Nordic banks and 7% in covered bonds. The remaining 28% consists of unsecured bonds and commercial papers. Today, we have 17% green financing, where commercial papers and bonds account for the majority. We're actively working to increase the portion of green assets. Our goal is to have at least 55% green assets by 2026. As you can see, our net debt to EBITDA is stable between 11x and 12 x. During the next 12 months, we'll refinance 28% of our outstanding loans corresponding to SEK 12.2 billion, commercial papers excluded. The majority of these, SEK 3.6 billion, consists of bank financing.
Our loan-to-value ratio was 49.3% which is far below our covenant levels. The average interest rate at the end of the period was 1.2% which is 7 basis points higher compared with the turn of the year. 2 basis points are explained by the fact that we have replaced SEK 400 million in commercial paper with bank financing, and the rest is due to increased STIBOR. We see higher funding costs in a short-term perspective primarily driven by increased STIBOR. The refinancing we have done during Q1 and the price indication we received from our banks regarding the maturities that will come in the autumn indicate margins near the same level as before COVID.
Thanks to a strong cash flow and LTV below 50% and an interest coverage ratio little above 6 times, we still continue to choose a short interest rate fixing. We're currently more focused on extending our average loan maturity. Overall, we have a strong financial position. In addition to existing loans, we have liquid funds, unutilized overdraft facilities, and unutilized credit facilities available corresponding to SEK 1.8 billion. As you can see, all our key ratios are improving. Return on equity amounted to 22.6%. ICR remains strong at 6.8 x. The growth in income from property management per share amounted to 9.7%. FMRV increased by 22% to 103.1 per share. That was all from me. I will now leave the word back to Knut.
Thank you, Rolf. The net letting figure for the first quarter is strong and is a sign of our high activity and a strong underlying market. For instance, look at the 12-month trailing four years back. You can clearly see we are picking up our activity post-COVID. Our market has a great outlook. Businesses are transferring to more sustainable business models and production. Our market is in the epicenter of providing clean and green energy to these companies. Together with a favorable climate and access to land, many industries are choosing Northern Sweden to be a key area for their future green production. We are saying in Diös that this is a green revolution. Over SEK 1,000 billion is expected to be invested into battery factories, fossil-free steel production and development, and production of non-fossil energy. Northvolt battery factory in Skellefteå have now produced their first battery.
LKAB has started to adapt their business to manufacture fossil-free steel. H2 Green Steel announced that they are building a new factory to produce fossil-free steel last February. The first quarter, Northvolt also announced that they will acquire Stora Enso's old factory in one of our cities, Borlänge. This is great news for Borlänge since it will create approximately 1,000 new jobs, and of course, it's also great news for us. We see many scale effects coming from the green revolution. New jobs are created and people need new residentials. There is a growing demand for social infrastructure like schools and kindergartens. There is also many new businesses created to serve these new establishments and, of course, many consultants that are in need of premises. All in all, the future for our market looks very exciting.
To achieve our goals, meet the Paris Agreement, and to be net zero in CO2 emission by 2045, we must be very active and also invest for the future. Today, we have 100% non-fossil electricity and 98% non-fossil energy. We are working closely with our suppliers of district heating to reduce the last part of the fossil emission. We see increased involvement from tenants, and we are signing more and more green lease agreements where we cooperate with the tenants to reduce energy, water, or waste. We have around 8% of our rental value for commercial lease agreements as green. We have been very active on the transaction market the last six months. We have closed acquisitions of net SEK 1.8 billion and one divestment of SEK 750 million in total of eight transactions.
All these transactions have been off-market transactions at attractive yields with a lot of potential in both rental renegotiations as in building rights. We have increased the share of residential in the portfolio, and with the divestment taking place in June, we will reduce the share of retail. We have been very focused on strengthening our position in Skellefteå since we see great growth in the city coming years and potential in both rental development and creating new buildings. This is what we have accomplished so far. Having that said, we can grow even further. We are still net buyers at the right yield levels. The current situation with rising interest rates has made us more cautious and risk-conscious. However, when the right properties are out for sale, we will act.
As I mentioned in the beginning, we have two new zoning plans that got legally binding during the quarter. Västra Kvarteret in Luleå of approximately 30,000 square meters and Vale 17 in Umeå of approximately 8,500 square meters. We have anchor tenants in place for both these development as we do not build on speculation. Construction start for Västra Kvarteret will be in Q2, and for Vale 17 in Q3 this year. Our ongoing projects are proceeding according to plan. We do not experience any delays or complications from the Ukraine situation as of yet. When we are negotiating rental agreements for our major project, we include an incentive for the contractor and tenant. To simplify, if the project will become more expensive, we get a higher rent, and if it gets cheaper, we'll get a lower rent.
We remain the same return on investment independent of the total cost. Of course, there's more details in this agreement, but it is our way to protect our returns from higher costs. We are presenting the strongest third quarter in Diös history. We have very solid financials with lower than average LTV and very good ICR. We have accessible liquidity of SEK 1.8 billion that gives us opportunities to act. The horrible situation in Ukraine has affected us all in so many ways. We have no direct or indirect exposure towards Ukraine or towards Russia for that matter. We are affected by what is happening with the commodities, energy prices, transportation, and so forth. We have experienced higher inflation figures for some time now, and we are seeing a higher cost pressure.
We are getting offers on new builds and major developments now 10% higher compared to six months ago. Within the ongoing business, the effects are relatively small as of today. However, we are following the development closely and have an active dialogue with suppliers and tenants. We have 97% protection towards inflation in our lease agreement. We have 90%, 93% of commercial rental agreements are inflation-based and 4% with fixed adjustment. Worth noticing is that there's a time lag CPI adjustment on these lease agreements. Higher inflation usually lead to higher rates, and as we can see during the quarter, we have had major increases in interest rates. We have a short maturity profile on our liability side and short interest rate binding. We did hedge part of the portfolio with interest rate swaps one year ago.
To conclude this, we have a good financial situation with relatively low LTV and strong ICR. Together, one of the higher yield gaps in the business and a very strong cash flow. Add to that good relationship with banks, diversified funding sources, and a good liquidity position. Let's talk about the markets. The business activity in our market continues to be very high. The 15 main cities, the access to clean green energy, and accessible land are some key factors for people and businesses to invest in our region. The Northvolt establishment in Borlänge is the main event during the quarter, but we also see many smaller businesses looking for premises. What we expect is the increased funding for Swedish defense and military capacity that will have a positive effect on our region and cities. We have a long-term view on our business, and we invest long term.
Although the near future has a lot of uncertainty, I'm convinced our business model and strategy will create good shareholder value over time. The trend of tenants requiring higher quality, centered, centrally located, and flexible office premises remains and will do so going forward. To be an attractive employer, you need to offer your employees inspiring and well-functioning social areas to attract people to the office. This is something that is core for us, and our local teams are experts on their home markets. We also have the cash flow to invest for our tenants. To conclude, our business model is based on creating long-term value for our tenants and our shareholders. We invest for a sustainable future and for our city's long-term growth. We are humble to the current situation.
Still, I'm convinced we are in the right market with the right attractive tenant offering to be able to successfully navigate through new challenges. This takes us to the end of this presentation. Thank you for listening. We are now ready for questions.
We will now begin the Q&A session. If you would like to ask a question, you may do so by pressing star followed by one on your telephone keypad now. If you have changed your mind, you may press star followed by two. When preparing to ask your question, please ensure that your phone is unmuted locally. We have our first question from Victor Krüeger from ABG. Please go ahead. Your line is open.
Thank you. First question, when do you estimate that the net letting for the quarter of SEK 22 million will generate rental income for your company?
Okay. Thank you for the question. It's during this year, of course, and we can see that the transaction, for instance, have an impact on this year, early this quarter with SEK 13 million. Of course, this SEK 22 million is a mix of the rental income in the near future. I think most of it is in this year.
Is it possible to have a proxy for the overall? I'm thinking for the coming quarters, when net letting has effects in general on your rental income.
Well, forecast for the next three quarters this year.
Okay. Within nine months usually.
It's hard to say, but since we are active, we have strong local teams, and we can see that the underlying market is growing even stronger. We have a very good feeling for the next year. For this year, I'm sorry, for the coming nine months, of course. I think this.
Okay
SEK 22 million in net letting for the first quarter is an implication of how it's gonna look for the near future.
Yeah. All right. Thanks. Knut Rost, you mentioned in your CEO comment that you have models for purchasing energy far in advance. My question is, for how far off in the future have you currently secured energy prices?
We work in a sort of portfolio way for the next coming six years. In six years, we have bought our fossil-free energy for about 25%. four to five years, about 50%. two to four years, it's about 75%. For this year, it's 90%. That's how we work with the portfolio. Moreover, our energy price is much lower than the rest of Sweden. I think that looks very good for us for the next coming six years.
Thank you. It was a strong surplus ratio also here in Q1 as you have alluded to. We are in a scenario with higher cost inflation and raw material costs. My question therefore is, do you have an approximation of how much of the cost increase that you can forward to tenants, or what you in contrast need to soak up yourselves?
Well, I think of our operating costs today, we pass on around 70% to tenants. As Knut said, for the energy there will be no major cost increases. That's not affected by the inflation right now. We must bear in mind that we also have index clauses in our leases. If the inflation goes up, we will also have higher rental income. In the short term it affects the costs more. We have no calculation on how the inflation will affect our operating costs.
That's clear. Thank you. Lastly, just considering the change of macro situation again, from beginning of Q1 until today, in terms of the transaction market, did I understand you right that your message here is that the activity is intact and sort of unchanged from when we talked in the previous quarter or from the previous quarter's presentation?
Well, we are in a financial position. We have the underlying strong market that gets even stronger. I think when the right opportunities appear, we will and we can act on that. We still can see that so far the yield is going down, but we are very interested in buying the right properties for the right price, of course. My forecast is that there will be lower transactions in the near future because I think the market is waiting a little for the. Today we heard that Riksbanken is raising the rate.
The rate, and I think we have to wait a little and maybe in the summer the activity will go up again. So far we have acquired properties for about SEK 1 billion-SEK 8 billion, and I think it will be more transactions from our side. Yes.
Is there any specific region where you're seeing transactions on the market right now or objects on the market?
No, not region. It's too early. We are interested in Luleå, Umeå, Skellefteå, Sundsvall, Östersund and so forth. You will see more acquisitions that we have in the pipeline in the near future. I think it will look the same as it has in this quarter. Maybe a little less second quarter, but then it will go up again.
All right. Thank you. Those are all my questions.
Thank you. As a reminder, ladies and gentlemen, to ask any further question, you can do so by pressing star followed by one on your telephone keypad now. We currently have no further questions. I'll now hand over to Knut Rost.
Well, thank you very much everyone for listening, and, have a good day, and we'll see each other in the future. Bye-bye.
Bye.